What Are Virtual Asset Service Providers?
Virtual asset service providers (VASPs) are entities that carry out exchanges between different forms of virtual assets or between virtual assets and fiat currencies. A VASP may also transfer virtual assets, administer them, or oversee their sale by an issuer’s office.
According to the Financial Action Task Force (FATF) definition, a virtual asset service provider can be any natural or legal person who conducts one or more of these activities. The definition does not, however, include software publishers whose products create new virtual assets.
How Do VASPs Work?
VASPs work by facilitating the exchange, transfer, safekeeping, and administration of virtual assets. They do this by leveraging the potential of blockchain technology.
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What Are Examples of Virtual Assets?
A virtual asset is a digital representation of value. Examples of such assets include cryptocurrencies, non-fungible tokens (NFTs), gaming tokens, and governance tokens.
Accordingly, virtual assets can be traded, transferred, and used to make payments. Their use provides scope for a range of benefits, including faster, easier, and more cost-effective payments. Let’s have a closer look at each of the said examples.
Cryptocurrencies such as Bitcoin and Ether can be used to make payments, having been transferred and traded. As such, cryptocurrencies are considered virtual assets. This includes stablecoins, which are cryptocurrencies that are pegged to commodities or fiat currencies, or whose supply is algorithmically regulated.
Fiat currencies, including their digital versions, are not considered to be virtual assets.
Non-Fungible Tokens (NFTs)
NFTs may be classed as virtual assets, but much depends on context. An NFT that is used for payment or investment purposes, for example, could fall under the definition of a virtual asset. However, NFTs that are used as collectibles would not ordinarily be considered virtual assets.
Gaming Tokens and Governance Tokens
Gaming tokens and governance tokens may also be considered virtual assets, though this is context-specific, just as it is with NFTs.
What Are Examples of Virtual Asset Service Providers?
Several types of businesses fall under the definition of virtual asset service providers. These include cryptocurrency exchanges, ATMs, wallet custodians, and crypto hedge funds.
A cryptocurrency exchange is an obvious example of a VASP. Also known as digital currency exchanges, these organizations facilitate the trading of cryptocurrencies, both for other digital currencies and for fiat money.
ATMs aren’t just for fiat currencies these days. Bitcoin ATMs allow customers to buy Bitcoin in exchange for cash, and sometimes to sell it too. As such, they fall under the VASP definition.
As the VASP definition includes organizations that administer and store virtual assets, as well as exchange and transfer them, cryptocurrency wallet custodians are also considered to be VASPs.
Crypto Hedge Funds
Some high-value investors use crypto hedge funds as their investment vehicles. Such funds fall under the VASP definition.
Why Are Virtual Asset Service Providers Necessary?
Blockchain technology was introduced to the world in October 2008, with Bitcoin following hot on its heels in January 2009. Since then, the cryptocurrency world has evolved rapidly, meaning a supporting infrastructure has had to grow too – VASPs included. They play a necessary role in enabling individuals to exchange their virtual assets, either for other virtual assets or for fiat currencies.
This need for VASPs and other services and tools related to virtual assets has increased significantly in the past ten years in particular. Back in 2013, there were around fifty cryptocurrencies. In 2023, there are 21,844 of them, with a combined total market cap of $830 billion. Such explosive growth cements the need for virtual asset service providers’ ability to exchange, transfer, and administer virtual assets.
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How Do Virtual Asset Service Providers Fight Fraud?
Virtual asset service providers can fight fraud by implementing robust Know Your Customer (KYC) processes. In so doing, they can support legislation such as the 6th Anti Money Laundering Directive (6AMLD), which has been designed to prevent fraudsters and other criminals from laundering their ill-gotten gains.
As the virtual asset sector remains largely unregulated, it presents a range of opportunities for exploitation by fraudsters. Cryptocurrency fraud is an ever-present danger, with crypto fraud reports between June 2020 and June 2021 increasing by 116%. According to Crystal Blockchain’s ‘Crypto and DeFi Hacks and Scams’ report, $12.1 billion in crypto assets were stolen between 2011 and 2021.
By implementing FATF guidance around robust KYC processes, VASPs can take a proactive stance on standing up to such abuse. To fight fraud as stringently as possible, VASPs should adhere to FATF guidance, regardless of whether they are exchanging virtual assets for fiat money or for other virtual assets.
That means applying measures such as record keeping and the reporting of suspicious transactions (in addition to KYC processes), just as traditional financial institutions do. They should also securely and confidentially transmit information relating to the payment originator and the beneficiary when sending payments to other VASPs – so they can do all they can to fight fraud.
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